WASHINGTON, D. C. 20429

NEWS RELEASE

FEDERAL DEPOSIT INSURANCE CORPORATIONWASHINGTON, D. C. 20429

Telephone: 393-8400_______ Br. 221

FCR RELEASE TUESDAY, MAY 19, 196b, AT 2 P. M ,I

THE GENERAL CHARACTER CF MANAGEMENT

Address of

Æ

K. A. RANDALL, DIRECTOR

FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D. C.

at the

ANNUAL CONVENTION of the

ILLINOIS BANKERS ASSOCIATION at the

Hotel Sheraton Jefferson St. Louis, Missouri

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Tuesday, May 19, 196b, at 12:30 p. m.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The General Character of Management

It is evident to all of us that the management of a bank is the basic element in a bank's success. The Congress recognized

the importance of management when it included the general character

of management among the six statutory factors the Federal Deposit

Insurance Corporation must consider when passing upon applications.

It is not overstating the case to say that the management ingredient is the central issue in most cases that come before the

FDIC Board of Directors. The other factors that must be considered,

such as financial history, condition, adequacy of capital structure,

and earnings prospects, are for the most part reflections of the

quality and ability of management. There are, of course, exceptions to this statement. But the management factor remains crucial.

Just what do I mean by management? I am not talking about such subjects as the art, the science, or even "the philosophy" of management. These challenging topics are best left to others.

The management concept I am talking about is much more fundamental.I am talking about the force that gives direction to the affairs of the bank, whatever shape the force may take. In short, I am talking about the direction and the control of the bank.

The fundamental obligation of the management of each bank rests with its board of directors. The duties and liabilities of directors include those imposed by Federal and State statutes, by

the charter and by-laws of the bank, and by the common law responsi

bilities arising from the fiduciary relationships of the directors


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to the hank’s stockholders, depositors, and other creditors. The

measure of this stewardship is stern indeed. A director must direct; the very term "director" implies action.

This is not to say that the directors must actively participate in the operation of the hank. Most directors have

neither the know-how nor the time to participate in the hank’s

day-to-day operations. However, the directors are responsible for the proper conduct of the hank’s affairs. Accordingly, the primary

responsibilities of the hank’s hoard of directors are to formulate

broad investment and operational policies and to select and appoint competent officers to execute these policies.

Responsibility for the daily operations of a hank rests with its managing and operating officers. Successful implementation

of policies formulated by the hank’s hoard of directors depends

upon competent officers. The executive officer of a hank, whatever his title may be, is the key figure. The success of a hank

may well depend upon the executive officer’s talents, personality, and general capability.

Control is, of course, an important factor in management. In some instances supervisory authorities have found it necessary to look beyond the hank’s official family when giving consideration to the general character of management. It has not been unknown

to have the control of a hank exercised by one or more individuals who were neither directors nor officers of the hank.


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Control can range all the way from the beneficent to the

nefarious. There have been some outstanding examples of the latter

type of control in the past year or so. I am referring to those rare but significant situations where the unscrupulous have seized

control of banks and immediately proceeded to loot and pirate.The looting is accomplished by various methods, including swift

expansion of the loan portfolio through extensions of credit to

the new owners and their related interests and through other self-

serving practices.It is not without reason then that the sale and transfer

of control of a bank has become of increasingly urgent concern to

supervisory agencies. In recent months the Federal Deposit

Insurance Corporation has been giving the matter intensive study

and now has under active consideration means to deal with this very

serious problem.An evaluation of management by supervisory authority is

much the same as an analysis of credit by a bank loan officer.Many of the same skills are used by field investigators working on

a new bank or branch. The major focus in both cases is upon manage

ment.The directorate, the active officers, major stock holdings,

and the ultimate control of the bank must all be accorded considered attention. Special circumstances or conditions must be recognized and given due weight. When certain conditions not readily apparent are ascertained, supervisors must look at the situation realistically and apart from any legal or theoretical

considerations of the management structure.Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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An appraisal of management as a group would not be

complete without a word about the one-man bank or the dominated

bank. This is a matter quite apart from those situations where

the control of a bank is acquired with the intention of quickly

denuding the bank of its assets. The domination may arise from stock control or even from sheer force of personality. Often this

domination is not harmful to the bank. It is wholly understandable

that a bank, like any other enterprise, needs a strong figure at its helm.

In extreme cases, however, these banks present management problems of several types. By definition, the one-man bank or the dominated bank lacks the benefits of group judgment and of group direction and control. The problem of management succession

inevitably arises under these circumstances. This problem might

appear to have received overemphasis from supervisors over the years. Yet a large portion of applications to merge and consolidate

are predicated precisely on this matter. Some of the banks that

plead a succession problem cannot by any measure be classified as small banks.

Everyone would agree that integrity is a prime requisite of a director or an officer of a bank. Service on a. bank directorate

is everywhere regarded as a high honor and a public trust. Few men are given this opportunity to serve their communities. Thé record of bank management in this respect is, by and large, an enviable one. It is important that this record not be soiled by the acts of the relatively few who have infiltrated the banking


- 5 -community with motives that are anything hut altruistic. It is

incumbent upon bankers to police the system. The attitude of a

supervisory authority should be one of positive encouragement

toward higher standards of management, not an attempt to assume the historic role of management.

Integrity, like other matters, can take subtle forms.

It is a fact that most bank failures in recent years have been

occasioned by embezzlements or other dishonest acts and not by external causes such as crop failures or other economic disturbances.

Generally, these defalcations are absorbed by fidelity insurance.But does the banker’s duty end when recommended fidelity coverage

has been provided? Or is it his responsibility to take all

reasonable measures to protect employees from undue temptation? Should not every bank have effective internal controls and a

sound audit program consistent with the size and type of operation? If one considers, for a moment, the impact of an arrest and a conviction on a man and his family, the answer becomes evident.

There has been a dramatic and alarming increase of

late in external crimes, such as burglary and robbery, against

banks. The physical security arrangements and protective devices

of some banks fall far short of the recommendations of the

appropriate authorities and of various bankers’ associations and

groups. Here again it is readily apparent that some banks look solely to their insurance protection. These banks are failing to fulfill their traditional role of good corporate citizen.Apart from the matter of losses, which for the most part, are


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■borne by the insurance carrier, are not all of us under a duty to

thwart and prevent crimes in our communities?

In addition to a high standard of integrity, it is

essential that the management of a bank possess a high order of competence. The assessment of management's competence - which is

one of the distinguishing features between a bank examination and a bank audit - is made on the basis of all available data. Where

appropriate, an attempt is made to look forward as well as back.

In the case of a newly organized bank applying for

deposit insurance, the general backgrounds of its directors and

the experience of its chosen executive officer constitute the best

indicators of management's competence. Generally a bank’s board

of directors should reflect a cross section of the community and represent broad diversified interests. It should be comprised of

individuals who have enjoyed a measure of success in their business and professional careers. Business acumen, financial position,

age, health and a demonstrated willingness to serve the bank and the community are all relevant considerations. Directors of a new bank must be supporters of the bank and, if the bank is to prosper, they must not permit their initial enthusiasm to wane.

An able, energetic, and personable executive officer is vital to the success of a new bank. The old saw that anyone can run a bank is not true today and, in all likelihood, never was.

The complex and diversified areas of investments, credits, operations, and public relations demand the services of a knowledgeable and an adaptable person. A mistake in any of these areas could proveextremely costly.


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In the case of operating banks, it can generally be said

that the proof of management's competence is in its performance. Naturally the performance, or the results of management's efforts, must be viewed in light of all the surrounding circumstances. Not

all banks operate under identical conditions. The difference in

the economic environments of various areas may be substantial. The

management of a bank located in an economically depressed area may

be performing in a first-rate manner, even brilliantly, but the

results may not be reflected in balance sheet figures or operating

statements. Growth areas can present matters that are, at once,

both problems and opportunities for management. Thus each situation must be assessed in its own surroundings.

Specifically, in evaluating the competence of the management of an operating bank, it is necessary to consider a number of matters in addition to the personal qualifications and abilities

of the directors and officers. The soundness of investment and operating policies and practices, the composition and quality of

assets, the adequacy of capital and the profit-making ability of the bank are all important. Each of these matters is a major subject in itself, but each is intimately related to the competence of management.

When applications are pending before the Federal Deposit Insurance Corporation, the final analysis and the essential issue is whether or not the management is able to operate the bank in asafe and sound manner.


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Banks are operating today in an intensely competitive

environment. Money and capital market conditions are nothing less

than dynamic. There is every reason to believe that these conditions

will persist. Under such circumstances the quality of management

cannot be overstressed. If a bsnk is to achieve its basic goals -

safeguarding depositors' funds, meeting legitimate credit needs,

making a profit and paying reasonable dividends to shareholders - it will require highly competent management.

During the coming years it will be of paramount importance for banks to continue to render effective and imaginative service

to their communities and to allocate their resources efficiently

and impartially, in a manner consistent with sound investor

judgment and basic credit principles. Investment policy will have

to be characterized by flexibility and assets will have to be managed actively.

Remember, above all, this one fact: No supervisory agency wants to, or can, manage a bank. It can, and must, insist

that bank managers adhere to proper standards - but profitable, effective management is the ultimate responsibility of the banker.


WASHINGTON, D. C. 20429

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